As a 58-year-old woman who needs to save for retirement, what is the best way to save?

I am 58 years old and I have a wonderful job that is paying six figures. My employer contributes 25 percent of my salary and bonus each year into an account (not a fund of any kind) for me. I already have a traditional IRA that I used to roll my 401(k) over to. I also have a Roth IRA that has a very small amount that I am not doing anything with. I will be retiring within 10 years and the 25 percent retirement account will not be enough to retire on so I feel like I need to do something else. Should I take some of my paycheck and contribute to my Roth IRA?

Career / Compensation, Retirement, Retirement Savings, 401(k), Women & Money
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July 2018

Congratulations on a well-paying position that you are excited about. Saving into a Roth IRA or (Roth 401k) is a great tool, but other factors may be more impactful to your retirement goal.

First check to make sure you don’t hit the income phase out limits for a Roth IRA. ($120,000 for single and $189,000 for married filing jointly.) If you are eligible you can do $5,500 plus an additional $1,000 for 2018 because you are 50 or older.

The 25% of salary and bonus that your employer contributes is a very nice benefit, but there are some important questions that you need to ask or potentially work with someone to double check and align with your goals. What will the short and long-term tax implications be of this account? How is it invested? What is the current value of the account? In ten years at $25,000 a year, at a 5% return you would have over $314,000 more in that account. But this is only one example. Your account may be much higher or lower in its return and risk.

Is the 401k that you rolled into an IRA from a previous employer? If your current employer has a 401K plan, it may have a Roth option that is not subject to income limits. For you $24,500 a year in Roth 401K savings. ($18,500 plus $6,000 because you are 50 or older.)

A tax analysis may guide you to the best way to save for your retirement. Think of three investment pools. (There are more complicated planning that I am not covering here.)

  • Tax Deferred (IRA or 401K). Reduces your current taxable income and thus lower your current taxes but are fully taxed as ordinary income on qualified withdrawals.
  • Tax Exempt (Roth IRA and 401K). Does not reduce your current income or lower current taxes, but you never pay taxes on qualified withdrawals.
  • Taxable Account. No limits to savings. Taxes on interest and realized gains.

Aligning these savings types with your retirement incomes such as social security and things like pensions can increase your after-tax income from the same amount of savings.

Compare current versus future tax rates for example. If you save 25% taxes now from IRA/401k savings to pay 35% in the future, then you may be tax inefficient. There are lots of variables (and rules) that warrant working with a planner that does this as part of their practice and that works with your tax professional.

Happy to help with any further questions or clarifications!

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